I currently have about a $700 budget at the current moment, and noticed that futureship has a Canon EOS Digital Rebel XT 8MP SLR Digital Camera With 18-55mm USM Kit for sale on boxing day, $400... is this a good deal?

For the record a 40D is an entirely different camera which will cost you way more!

The Nikon D40 which you are talking about is a step down from the Canon XT in my opinion. If you ever want to take your hobby further the Canon EOS won't limit you and it takes nearly all of canon's lenses. The Nikon D40 on the other hand does not. So if you're after a small point and shoot style camera which you intend to put one lens on and happy snap away then the Nikon D40 is a great choice. But if you intend to expand your photography hobby the Canon will give you more mileage as the body is not as limiting.